How central banks will push up the gold price

Gold on Tuesday was inching its way back to the $1,200 an ounce, a level it hasn't strayed too far from for the better part of three months.

A new research note by anlyst Simona Gambarini of Capital Economics suggests official sector buying can take much of the credit for establishing something of a price floor for the metal this year.

During the first quarter this year, the World Gold Council estimates that 120 tonnes of gold were added to global central bank reserves.

Central banks have upped their share of overall gold demand from around 2% in 2010 to as much as 14% last year and in 2013.

Just to up gold as a share of forex reserves to 5% central banks in emerging economies need to buy 8,000 tonnes

Gambarini expects this trend to strengthen adding that "any emerging market central bank looking to reduce exposure to the dollar still has few credible alternatives to gold":

Most developing countries still hold less than 10% of their reserves in gold, compared to 70% or more in advanced economies. Admittedly, the much higher share in the latter is mainly a legacy of the Gold Standard. Nonetheless, an optimal share that makes the most of gold’s diversification benefits would probably be at least 15%. Even the European Central Bank (ECB), established long after the demise of the Gold Standard, holds around 25% of its reserves in gold.

Barron's quotes chief economist Warren Hogan and commodity strategist Victor Thianpiriya of ANZ, an Antipodean bank, on the same issue:

"If all central banks in the world were to hold at least 5% of their foreign exchange reserves as gold, this would require the purchase of almost 8,000 tonnes of gold,” argued Hogan and Thianpiriya. Emerging market central banks should remain net buyers of gold to bring their allocations more in line with developed countries’ – to the tune of about 75 tonnes a year, they added.

While Russia's central bank has been most active recently (30 tonnes in March and another 8.3 tonnes in April), rumours about massive buying from People's Bank of China are perennial.

China's gold reserves are officially put at 1,054 tonnes – a number authorities haven't updated since 2009.

Gold makes up only around 1% of the country's $3.8 trillion in reserves compared to more than 70% for the United States which holds more than 8,000 tonnes of gold in vaults.

ANZ expects the gold price to top $2,000 an ounce by the end of the decade while Capital Economics has a $1,400 forecast for the end of this year.